The Motley Fool

Top stocks for May

We asked our writers to share their top stock picks for the month of May, and this is what they had to say:

Royston Wild: Barratt Developments

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I am convinced the rampant share price run over at Barratt Developments (LSE: BDEV) has much further to run, particularly as the stock’s ultra-low valuations fly in the face of reassuringly robust housing market indicators.

For the year to June 2017, Barratt is expected to generate earnings expansion of 2%, leaving the business dealing on a forward P/E ratio of 10.4 times. And the builder is also a great pick for dividend chasers (the yields clocks in at 6.9% thanks to a predicted 39.7p payout).

Barratt advised in February that “with a record forward order book, strong consumer demand and a positive lending backdrop, we remain confident in our outlook for the full year.” And I reckon a similarly-positive trading update (latest numbers are slated for Wednesday, May 10) could prompt further stock price strength.

Royston Wild has no position in Barratt Developments.

Peter Stephens: British American Tobacco

The old adage ‘sell in May and just walk away’ could be particularly relevant for investors this year. The General Election could cause investors to become uncertain regarding the future prospects for the economy – particularly if polls narrow in the coming weeks.

Therefore, buying a defensive stock with stable growth forecasts may be a shrewd move. British American Tobacco (LSE: BATS) has a robust growth rate and solid income prospects, which may prove popular with inflation moving higher. Its purchase of the remainder of Reynolds will make it the biggest tobacco stock in the world, which may mean even greater stability and resilience in future.

Peter Stephens owns shares of British American Tobacco.

Rupert Hargreaves: Cambian Group

Care company Cambian Group (LSE: CMBN) flies under the radar of most investors because the firm has reported four consecutive years of losses. However, City analysts are extremely optimistic about the group’s prospects for 2017, and the market is starting to wake up to this fact. Specifically, analysts expect the company to report earnings per share growth of 142% for the year ending 31 December 2017, as Cambian sells off non-core operations and focuses on growth. For the full year, the company is expected to report a positive pre-tax profit of £14m. Further growth is projected for 2018. Analysts are forecasting earnings per share growth of 28%  for the year with a pre-tax profit of £17m expected. 

The shares currently look expensive as they trade at a 2018 P/E of 20, but with explosive growth predicted, it could be worth paying a premium to get your hands on Cambian’s shares. 

Disclosure: Rupert owns no share mentioned. 

Jack Tang: Derwent London

My top stock pick for May is property company Derwent London (LSE: DLN). The REIT is attractively valued, with shares trading at a 15% discount to its net asset value (NAV), compared to the UK property sector’s average discount of 4%.

Of course, investors are concerned about its exposure to the Central London office market, given the uncertainty that Brexit has created. However, tight supply due to a lack of development activity in recent years should keep vacancy rates low and support further rental growth in the medium term. So far, Derwent London’s asset values have held up pretty well — NAV per share increased 0.5% in 2016 to 3,551p.

Disclosure: No positions

G A Chester: Domino’s Pizza Group

Domino’s Pizza (LSE: DOM) shares dived after its annual results in March. There was nothing wrong with them, including typically strong like-for-like sales growth of 7.5%.

However, a slowing to 1.5% in the first weeks of the new financial year upset the market. And despite management subsequently saying it expects a recovery to 5-6%, the shares remain depressed.

Domino’s long-term growth story remains intact, in my view, and I side with the more bullish analysts, whose earnings forecasts put the company on an historically low P/E of under 20. As such, I think now could be an opportune time to invest.

G A Chester has no position in Domino’s Pizza.

Edward Sheldon: International Consolidated Airlines

My top stock for May is International Consolidated Airlines (LSE: IAG).

The airline operator has been a strong performer in recent years with earnings rising significantly, and on consensus FY2017 earnings of €0.88, the stock trades on a P/E ratio of just 7.5 right now. Furthermore, the yield on offer is a robust 3.6%, forecast to grow by 3% and 8% over the next two years.

This looks good value to me and I’m clearly not alone in my thinking, as the fact that the company is buying back its own shares suggests that management also believe the share price is undervalued at present.

Edward Sheldon has no position in International Consolidated Airlines

Kevin Godbold: Luceco

Electrical accessory and LED lighting products manufacturer Luceco’s (LSE: LUCE) arrival on the London stock market in October provided new funds that look set to turbocharge investment in growth.

The FTSE Small Cap firm reckons recent expansion of its factory in China will enable innovative new products to drive margins, sales and earnings higher as the company expands abroad. The plan appears to be working and Luceco sports an impressive set of financial numbers, which have helped the shares put in a perky performance so far. I think May, and the rest of 2017, look like being very interesting for the firm’s shareholders.

Kevin owns shares in Luceco.

Paul Summers: On The Beach

My pick is online travel agent On the Beach (LSE: OTB). Since hitting a low of 177p last July, this undeniably cyclical stock has climbed a very encouraging 86%.

February’s encouraging trading update revealed a 20% year-on-year rise in revenue for the four months to the end of January. On the Beach’s board also stated its belief that the company was “well positioned to generate strong growth” in 2017 — something reflected in the stock’s low PEG ratio of just 0.76.

With a net cash position, flexible business model, decent free cashflow and far higher operating margins than larger operators, I’m optimistic that shares in this disruptive small cap will continue climbing both before and after half-year results on 11th May.

Paul Summers own shares in On the Beach

Roland Head: Redrow

FTSE 250 housebuilder Redrow (LSE: RDW) has risen by 33% this year, after a steady stream of broker upgrades. Despite this, the group’s stock still trades at a discount to some of its larger peers.

I’m not sure this discount is justified. Pre-tax profit is expected to climb 22% to £306m this year and the group’s operating margin has risen from 10% to 19% over the last five years. 

Redrow appears to be operating well and generating increasing amounts of surplus cash. I think there’s scope for significant dividend growth this year, ahead of current forecasts. 

Roland owns shares of Redrow.

Bilaal Mohamed: RPC Group

My top stock for May is leading global plastics business RPC Group (LSE: RPC). The Rushden-based FTSE 250 firm is due to release its full-year results next month, and management is already confident that contributions from both acquisitions and continued organic growth will bring about a much improved performance for fiscal 2017.

RPC has made several shrewd acquisitions during the course of the year, including British Polythene Industries (BPI) and Global Closure Systems (GCS), both of which are integrating well. After a sharp pull-back since the start of the year, RPC’s shares currently trade on a fairly modest valuation of 12 times earnings for the current year to March 2018, dropping to just 11 times for fiscal 2019. I think now could be a good time to pick up the stock ahead of full-year results next month.

Bilaal has no position in any shares mentioned.

Ian Pierce: Worldpay

You don’t need to be a genius to see that consumers across the world are increasingly going cashless. One company cashing in on this is in a major way is payment processor Worldpay (LSE: WPG). The company is consistently growing sales, profits and cash flow at double-digits by increasing market share and moving into new countries.

The company’s asset-light business model, stellar margins, and high cash generation give plenty of room for huge shareholder returns in the coming years. And with its shares relatively sanely priced at 22 times earnings, Worldpay is one to watch in May. 

Ian Pierce has no position in Worldpay. 

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